Buybacks will now be seen for the self-serving folly they are

[vand]

Buybacks have been all the rage as a way of increasing a company's shareprice into an ever rising market. Existing shareholders get richer, management can say look how fantastic we have done, and everyone is a winner, apparently. 

I have expressed my dislike for companies who engage in this practice and why I always prefer dividend payouts. For in doing so they were burning through cash that should have been returned to investors.

Now with their share prices far below the level at which most of these shares were repurchased, these companies will cease their buybacks operations and in all likelihood start issuing new share capital to add insult to injury.

[bwall]

I swear I read the same thing in 2009. Yet, here we are ten years later and buybacks are unchecked.

[norajean]

Most companies with buybacks also pay dividends, so investors get cash and a stock price bump. Dividends need to be predictable and sustained or investors will flee. Buybacks bring flexibility as they can be adjusted easier than dividends with less consequence on stock price when they are decreased or stopped. A more valid objection would be companies buying back shares instead of lowering debt.

Should companies requesting bailouts suspend their dividend?

[JetBlast]

I don’t oppose buybacks completely. I have no objection to buybacks that counter the dilutive effects of employee stock plans like grants, options, and discounted purchase plans. It’s simply another way of converting that stock compensation into a cash expense for the company.

Buybacks to return capital to owners are more problematic because 99% of management teams have proven they don’t know how to judge whether their company is fairly valued. They’re overconfident of their abilities and future earnings, and undisciplined in their repurchase process. Management is usually also subject to compensation clauses that give incentive to repurchase stock, even when overpriced.

While in theory they should work, too many management teams have proven their ineptitude at buybacks, and I’ll shed no tears if they are banned.

Most companies with buybacks also pay dividends, so investors get cash and a stock price bump. Dividends need to be predictable and sustained or investors will flee. Buybacks bring flexibility as they can be adjusted easier than dividends with less consequence on stock price when they are decreased or stopped.

I think this issue is overblown. The ‘requirement’ that dividends be consistent is somewhat US centric, and a relic of a time when retirees might have their entire income be dividends from one or two companies like AT&T or GM. With the easy diversification of mutual funds and ETFs, there’s not much reason for someone to be so tied to one stable dividend.

I’d have no problem with completely variable dividends, but as a compromise to those wanting stability a more sensible plan may be a stable low dividend and a special dividend to return the excess cash. Perhaps a policy could be set by management that a percentage of free cash flow will be returned, barring unusual circumstances where management feels more cash should be retained due to business conditions and opportunities.

[MaaS]

Buybacks have been all the rage as a way of increasing a company's shareprice into an ever rising market. Existing shareholders get richer, management can say look how fantastic we have done, and everyone is a winner, apparently. 

I have expressed my dislike for companies who engage in this practice and why I always prefer dividend payouts. For in doing so they were burning through cash that should have been returned to investors.

Now with their share prices far below the level at which most of these shares were repurchased, these companies will cease their buybacks operations and in all likelihood start issuing new share capital to add insult to injury.

Agree, but it's nuanced. For Apple, Google, Berkshire, etc buybacks are an essential part of capitalism. But, for most businesses, it's an absolute fraud.

I'm unsure the best way to structure it but we need to get to the general end goal of banning businesses from taking on debt to buy stock.

Businesses who take government aid should be forced to issue AT LEAST as many shares as they bought, no matter the price.

[reeshau]

...we need to get to the general end goal of banning businesses from taking on debt to buy stock.

This, I can get behind.  There are valid reasons, as discussed here, to argue for buybacks vs. dividends.  But buybacks funded by debt--simply upping the company's leverage--will indeed fulfill the title of this thread.

I still also exempt the companies you mentioned; they all have huge net cash positions, and were a) using debt funding to manage offshore earnings before tax reform and 2) take advantage of low rates.  They are not over-levered.

[merula]

I don’t oppose buybacks completely. I have no objection to buybacks that counter the dilutive effects of employee stock plans like grants, options, and discounted purchase plans. It’s simply another way of converting that stock compensation into a cash expense for the company.

Buybacks to return capital to owners are more problematic because 99% of management teams have proven they don’t know how to judge whether their company is fairly valued. They’re overconfident of their abilities and future earnings, and undisciplined in their repurchase process. Management is usually also subject to compensation clauses that give incentive to repurchase stock, even when overpriced.

While in theory they should work, too many management teams have proven their ineptitude at buybacks, and I’ll shed no tears if they are banned.

Exactly this. I've seen a lot of talk about gross buyback numbers that completely ignore the impact of employee stock plans. Net buybacks are the core of the issue.

My company finally took our share price off of our intranet homepage. For years it was listed right next to the ethics hotline number Good riddance.

[seattlecyclone]

I've seen a rather large number of social media posts in left-leaning places arguing that companies that have bought back many shares in the past few years shouldn't be bailed out. Notably absent in these arguments is the idea that dividend-paying companies should be similarly disqualified from bailouts. Why is that? If a company's choice to distribute cash to shareholders in good years should disqualify them from a bailout in bad years, what difference does it make whether they chose to distribute cash in a way that would reduce the number of shares, or in a way that would reduce the value of each share?

[vand]

I've seen a rather large number of social media posts in left-leaning places arguing that companies that have bought back many shares in the past few years shouldn't be bailed out. Notably absent in these arguments is the idea that dividend-paying companies should be similarly disqualified from bailouts. Why is that? If a company's choice to distribute cash to shareholders in good years should disqualify them from a bailout in bad years, what difference does it make whether they chose to distribute cash in a way that would reduce the number of shares, or in a way that would reduce the value of each share?

Buybacks are essentially a tax dodge. So like the GFC we are making arguments about privatised profits and socialised losses.

That is not my own reason for disliking buybacks. My beef with them is that they are a form of financial engineering. They seemingly raise company earnings per share without actually raising the productive capacity of the company or, when taken as a whole, the productive capacity of the economy.. that is why the stock market can appear to outgrow the real economy by so much, because this wizardry suggests company are continuing to grow earnings even if they are in reality flat.

[Stimpy]

My beef with them is that they are a form of financial engineering. They seemingly raise company earnings per share without actually raising the productive capacity of the company or, when taken as a whole, the productive capacity of the economy.. that is why the stock market can appear to outgrow the real economy by so much, because this wizardry suggests company are continuing to grow earnings even if they are in reality flat.

They absolutely are.  I can only hope those companies that do, do a bailout are not allowed to do buybacks for at least a few years.  Heck no direct shareholder compensation would be grand!  (ie No buybacks, no dividends, and I love my dividends, but if they are getting a bailout, then the company is in trouble thus....  the reward is the company continues and will eventually give compensation to the shareholders in the "far" future.) 

I just wish people (Left, right, middle and everywhere in between) understood buybacks and dividends more.  I can only hope this gives them a little more understanding with the fact that there will be discussions done on this outside a place where it is normally talked about.

[seattlecyclone]

I've seen a rather large number of social media posts in left-leaning places arguing that companies that have bought back many shares in the past few years shouldn't be bailed out. Notably absent in these arguments is the idea that dividend-paying companies should be similarly disqualified from bailouts. Why is that? If a company's choice to distribute cash to shareholders in good years should disqualify them from a bailout in bad years, what difference does it make whether they chose to distribute cash in a way that would reduce the number of shares, or in a way that would reduce the value of each share?

Buybacks are essentially a tax dodge.

How so?

I understand the differences in taxation on the shareholder side, at least in the US. With a buyback the only people taxed right away are those who sold their shares back to the company. They have to pay capital gains tax, but they were going to sell anyway so there's no difference for them whether the company buys those shares or someone else buys them. For everyone else the value stays locked up in their shares until they eventually sell and are taxed on the gains. Compare that to a dividend where the shareholder is taxed immediately but has a corresponding reduction in the value of their shares (and eventual capital gains tax). A buyback is not really a reduction in the amount of income realized by the taxpayer compared to a dividend, but it does shift the timing of that income into the future and give the investor more control over when that income is realized.

On the corporate side I'm not aware of any difference in the tax treatment of a dividend compared to a buyback. I'd love to read more about this topic if I'm wrong though!

That is not my own reason for disliking buybacks. My beef with them is that they are a form of financial engineering. They seemingly raise company earnings per share without actually raising the productive capacity of the company or, when taken as a whole, the productive capacity of the economy.. that is why the stock market can appear to outgrow the real economy by so much, because this wizardry suggests company are continuing to grow earnings even if they are in reality flat.

I think you've pointed out why earnings per share isn't a great metric to use in isolation, as the number of shares can go up or down based on buybacks and issuance of new shares. Price to earnings ratios seem to be more resilient to changes in the number of shares.

Back to my original point, I still don't see why I as a citizen should have any preference for giving bailouts to dividend-paying companies over share-buying-back companies. The argument "if they had cash to buy back their shares, how dare they ask for a bailout now?" still rings just as true to me as "if they had cash to pay dividends, how dare they ask for a bailout now?" does. The two transactions are more similar than different.

[Stimpy]

Back to my original point, I still don't see why I as a citizen should have any preference for giving bailouts to dividend-paying companies over share-buying-back companies. The argument "if they had cash to buy back their shares, how dare they ask for a bailout now?" still rings just as true to me as "if they had cash to pay dividends, how dare they ask for a bailout now?" does. The two transactions are more similar than different.

There isn't any any difference as far as if they get a bailout in my opinion.  I suspect the ONLY reason dividends aren't being brought to the forefront is that politicians are talking buybacks, not dividends.   If Sanders, or Paul, or <insert big name here> says something, I guarantee it will become just as valid a reason to not give a bailout.

[vand]

Back to my original point, I still don't see why I as a citizen should have any preference for giving bailouts to dividend-paying companies over share-buying-back companies. The argument "if they had cash to buy back their shares, how dare they ask for a bailout now?" still rings just as true to me as "if they had cash to pay dividends, how dare they ask for a bailout now?" does. The two transactions are more similar than different.

It's a fair point, and my only response is that buyback money also escapes taxation, so the company has contributed much less back into society, whereas dividends are subject to taxation in most countries.

[chasesfish]

Buybacks have been all the rage as a way of increasing a company's shareprice into an ever rising market. Existing shareholders get richer, management can say look how fantastic we have done, and everyone is a winner, apparently. 

I have expressed my dislike for companies who engage in this practice and why I always prefer dividend payouts. For in doing so they were burning through cash that should have been returned to investors.

Now with their share prices far below the level at which most of these shares were repurchased, these companies will cease their buybacks operations and in all likelihood start issuing new share capital to add insult to injury.

For what its worth Warren Buffet would disagree with you.

Buybacks are a symptom, but not the problem.  The problem is corporate governance and management incentives.  They tend to relax at the end of a cycle and passive investment has contributed to this.

Personally, I've reviewed many proposals and the best I've seen is to just ban insider sales around a pretty long window if the company is buying back shares.  If management declares the best use of my capital is to buy the company's own stock, then naturally the last thing they should want to do is to sell their own shares!

https://corpgov.law.harvard.edu/2019/02/22/a-capitalists-solution-to-the-problem-of-excessive-buybacks/

I've also had more damage done to me by moronic acquisitions by management than stock buybacks.  If they aren't allowed to buy back stock (like many EU companies), then management overpays to buy companies. 

[seattlecyclone]

Back to my original point, I still don't see why I as a citizen should have any preference for giving bailouts to dividend-paying companies over share-buying-back companies. The argument "if they had cash to buy back their shares, how dare they ask for a bailout now?" still rings just as true to me as "if they had cash to pay dividends, how dare they ask for a bailout now?" does. The two transactions are more similar than different.

There isn't any any difference as far as if they get a bailout in my opinion.  I suspect the ONLY reason dividends aren't being brought to the forefront is that politicians are talking buybacks, not dividends.   If Sanders, or Paul, or <insert big name here> says something, I guarantee it will become just as valid a reason to not give a bailout.

Right, I know that some politicians are making a big deal out of buybacks, and dividend-paying companies are conspicuously absent from their ire. Still trying to understand why that is.

[PathtoFIRE]

The buyback blowback is hard for me to understand, I'd love to learn more and potentially shape my views.

Putting aside some tax differences, which to me mostly come down to the ways we treat 'short term vs long term' and 'earned vs unearned income' differently...

...buybacks and dividends are essentially the same. If a corporation generates more profit than it has a need for (after updates, expansions, acquisitions, new products/services, etc.), then it can hoard the excess profit in anticipation of a future need, or return it to the owners [and likely does varying degrees of both]. Explain to me how, apart from how the government chooses to tax, it is any different to pay owners a cash equivalent to 2% of market cap every year, versus buying back 2% of market cap and subsequently repricing outstanding shares +2%? Why is one a normal accepted practice for publicly traded companies, and the other something unethical or dangerous? To me, both result in the same two choices for investors: 1) buy more of the company [reinvest dividends; or hold the appreciated shares, respectively], or 2) redeploy to a different investment [use the dividend to purchase different stocks, bonds, real estate, or investments; or sell off the newly appreciated shares to bring your exposure back down to the same amount pre-buyback, respectively].

Is there really any difference to investors on whether management convinces the board to buyback shares, making management's stock options worth more? Versus convincing the board to issue the same amount in dividends, results in the same net addition $ to management? I guess this raises one potential difference, maybe this is what everyone is implying: additional incentive pay or stock options for hitting certain stock prices targets...paying a dividend doesn't by itself increase the value of a company's stock, so wouldn't technically influence such targets (except some investors see dividends as sign of healthy company and maybe pay a little premium). But the problem isn't the buyback, it's the incentive structure, which may favor returning money to owners in an environment where additional business investment might still generate better returns.

[MilesTeg]

The buyback blowback is hard for me to understand, I'd love to learn more and potentially shape my views.

Putting aside some tax differences, which to me mostly come down to the ways we treat 'short term vs long term' and 'earned vs unearned income' differently...

...buybacks and dividends are essentially the same. If a corporation generates more profit than it has a need for (after updates, expansions, acquisitions, new products/services, etc.), then it can hoard the excess profit in anticipation of a future need, or return it to the owners [and likely does varying degrees of both]. Explain to me how, apart from how the government chooses to tax, it is any different to pay owners a cash equivalent to 2% of market cap every year, versus buying back 2% of market cap and subsequently repricing outstanding shares +2%? Why is one a normal accepted practice for publicly traded companies, and the other something unethical or dangerous? To me, both result in the same two choices for investors: 1) buy more of the company [reinvest dividends; or hold the appreciated shares, respectively], or 2) redeploy to a different investment [use the dividend to purchase different stocks, bonds, real estate, or investments; or sell off the newly appreciated shares to bring your exposure back down to the same amount pre-buyback, respectively].

Is there really any difference to investors on whether management convinces the board to buyback shares, making management's stock options worth more? Versus convincing the board to issue the same amount in dividends, results in the same net addition $ to management? I guess this raises one potential difference, maybe this is what everyone is implying: additional incentive pay or stock options for hitting certain stock prices targets...paying a dividend doesn't by itself increase the value of a company's stock, so wouldn't technically influence such targets (except some investors see dividends as sign of healthy company and maybe pay a little premium). But the problem isn't the buyback, it's the incentive structure, which may favor returning money to owners in an environment where additional business investment might still generate better returns.

Others are far more capable of listing the tradeoffs of both schemes, but the fact remains that if you leave your company so financially weak that a couple weeks of turmoil cause you to go bankrupt you have completely and utterly failed. You and your controlling shareholders deserve to lose it all and should be left to do so. What is salvagable from your business should be sold off to the highest bidder and if (and only if) that business is vital the new ownership and management should receive financial assistance if needed.

Apple, for instance, has done a major buy back but they didn't leave the company financially crippled to do so.

[PathtoFIRE]

...if you leave your company so financially weak that a couple weeks of turmoil cause you to go bankrupt you have completely and utterly failed.

But you can do that with both an overly generous dividend, as well as an overly generous stock buy back. Both take the same amount of money out of the company, and return it to the owners to do with as they please. Both actions leave the company's books in exactly the same state, or least at least seem to, that's why I'm asking if there's a nuance that I don't get. But isn't the company, and the board of directors, and the ownership in general, in the best position to make that determination?

Also, I hear the argument that stock buy backs tend to happen more during the later market upswings, rather than during downswings when the stock is "cheaper", but again I don't see the difference in that argument, because it's still a relatively fixed amount of money being returned to owners, in two different but comparable ways. In fact, I'd argue that because dividends have a slight air of barometry to them, companies might be inclined to be a little more risky with them, refusing to reduce or delaying reduction of dividends when profits become a little tighter, whereas stock buy backs are usually more one-off events, and cessation of them during tighter times don't set off as many alarm bells.

[MilesTeg]

...if you leave your company so financially weak that a couple weeks of turmoil cause you to go bankrupt you have completely and utterly failed.

But you can do that with both an overly generous dividend, as well as an overly generous stock buy back. Both take the same amount of money out of the company, and return it to the owners to do with as they please. Both actions leave the company's books in exactly the same state, or least at least seem to, that's why I'm asking if there's a nuance that I don't get. But isn't the company, and the board of directors, and the ownership in general, in the best position to make that determination?

Also, I hear the argument that stock buy backs tend to happen more during the later market upswings, rather than during downswings when the stock is "cheaper", but again I don't see the difference in that argument, because it's still a relatively fixed amount of money being returned to owners, in two different but comparable ways. In fact, I'd argue that because dividends have a slight air of barometry to them, companies might be inclined to be a little more risky with them, refusing to reduce or delaying reduction of dividends when profits become a little tighter, whereas stock buy backs are usually more one-off events, and cessation of them during tighter times don't set off as many alarm bells.

A dividend is something that a company does to provide value to each and every shareholder.

A buyback is something that is done specifically to provide more value to people who are going to sell off shares (typically, management and large shareholders).

A dividend encourages long term investment, a buyback encourages cutting and running.

[seattlecyclone]

A dividend is something that a company does to provide value to each and every shareholder.

A dividend doesn't "provide value" to shareholders. No value is created by a dividend payment. Instead value is moved from shares to cash in an amount that almost certainly doesn't exactly match up with the shareholder's desire for more cash at that moment.

What provides value to shareholders is not dividends, but rather a consistent record of solid earnings that serve to back up the share price.

A buyback is something that is done specifically to provide more value to people who are going to sell off shares (typically, management and large shareholders).

How do you figure? Buybacks typically represent a minuscule fraction of the share trading volume. If the buyback trades cause a significant change in the price of the shares, they're doing it wrong.

A dividend encourages long term investment, a buyback encourages cutting and running.

This statement doesn't make sense to me. A dividend reduces the value of the shares I own. A buyback does not. If I want to maintain the same amount of investment in that company after the dividend, I have to take action to purchase more shares. If I want to be a long-term investor in a company that does buybacks, I don't have to do a thing. The value of the shares I own is the same before and after the buyback.

[vand]

The buyback blowback is hard for me to understand, I'd love to learn more and potentially shape my views.

Putting aside some tax differences, which to me mostly come down to the ways we treat 'short term vs long term' and 'earned vs unearned income' differently...

...buybacks and dividends are essentially the same. If a corporation generates more profit than it has a need for (after updates, expansions, acquisitions, new products/services, etc.), then it can hoard the excess profit in anticipation of a future need, or return it to the owners [and likely does varying degrees of both]. Explain to me how, apart from how the government chooses to tax, it is any different to pay owners a cash equivalent to 2% of market cap every year, versus buying back 2% of market cap and subsequently repricing outstanding shares +2%? Why is one a normal accepted practice for publicly traded companies, and the other something unethical or dangerous? To me, both result in the same two choices for investors: 1) buy more of the company [reinvest dividends; or hold the appreciated shares, respectively], or 2) redeploy to a different investment [use the dividend to purchase different stocks, bonds, real estate, or investments; or sell off the newly appreciated shares to bring your exposure back down to the same amount pre-buyback, respectively].

Is there really any difference to investors on whether management convinces the board to buyback shares, making management's stock options worth more? Versus convincing the board to issue the same amount in dividends, results in the same net addition $ to management? I guess this raises one potential difference, maybe this is what everyone is implying: additional incentive pay or stock options for hitting certain stock prices targets...paying a dividend doesn't by itself increase the value of a company's stock, so wouldn't technically influence such targets (except some investors see dividends as sign of healthy company and maybe pay a little premium). But the problem isn't the buyback, it's the incentive structure, which may favor returning money to owners in an environment where additional business investment might still generate better returns.

Dividends release earnings back into the economy to be spent on goods and service (granted, some of that might go to buying more shares, but some of it won't.. that is the investor's prerogative) and the company's individual success helps whole economy.

Buybacks simply makes the company more expensive to buy. No money is released back into the economy, and neither does it increase the company's productive capacity. It's a win for existing shareholders, but society as a whole doesn't benefit.

It's this sort of financial engineering that has contributed to the move towards populism we are seeing, where most people do no feel that they are participants of the "best economy in history"

[chasesfish]

@vand

I still don't understand...

A dividend sends money into the economy by evenly sending a small fraction to all shareholders.  A buyback sends a larger dollar amount to a willing seller who converts their share in cash.

The same amount of cash left the corporate balance sheet and went out "into the economy".

The only way to regulate what you're trying to say is to pass laws on how exactly an investor may spend dividend or buyback money.  Can they only buy back shares held by a retail investor through tender offer and not buy from a mutual fund/pension fund?

In countries where buybacks have been banned, management does really stupid mergers.  Want to talk about bad for the average person?  Management overpays for a company, loads the company balance sheet up with debt to do it, then has to cut a ton of jobs to pay for the acquisition.  The only winners are investment bankers who get a commission, the executives of the remaining company who claim bigger = more pay, and maybe the shareholders of the acquired company if its done with cash.  Its why Inbev now owns the Anheiser Bush, they weren't allowed to buy back stock so they took over the biggest brewery in the US.  Ask some employees how that's going.


I'm a pretty open minded and left leaning about a lot of issues, but the cultish/populist obsession with buybacks is really confusing to me.  Its just mathematics.   The "financial engineering" piece can happen in a lot of ways, that's a more corporate governance or overall capital control issue.   The airlines are regulated and will end up with capital controls after this, its what happens when you go to Uncle Sam for a bailout

[PathtoFIRE]

I think the "buying at inflated prices" is a bit of a red herring, but I do agree that the one problem area with buybacks that I can see relates to boards providing outsized executive compensation to hit certain stock prices, rather than bonuses based on company fundamentals. But that's an executive compensation issue and should be addressed thusly.

[Stachless]

To take the other side here...suppose you are a very large company with a generational track record of annual dividend increases...take AT&T for example.  You generate enormous cash flows that easily cover a rather generous 7%+ dividend yield; yet you can borrow hundreds of millions more at rates under 4%.

How is it *not* in the best interest of the shareholders to borrow at 4% to retire shares paying out 7%+?

Borrowing cheap to retire these shares (and I do mean retire - this does no good if they are re-issued) is clearly the better allocation of capital given the cash flows to support the debt.

[chasesfish]

I want to leave this post I wrote back in October and recently updated as an example of what can go wrong if you ban buybacks:  More stupid acquisitions. 

Head to the bottom for the update.  I'm losing up to five quarters in dividends I was relying on as part of my early retirement budget because of this.  I would have rather they bought back stock or reduced debt.

[celerystalks]

Buybacks are analogous to dividend reinvestment.

[vand]

I certainly also agree that acquisitions are a terrible and value-destroying endevour, but that is a different question.